Trading volume in emerging markets fell off a cliff in 2014, spending 2015 bouncing along the bottom before spiking higher as 2016 came into view. LatAm real estate was no exception. Total trading volume for LARE Index holdings got as low as $100mm per day in 2015 before spiking higher in early 2016 as smart money poured into the sector. What we’re seeing now is the trailing three month average clearly moving higher, with many weeks exceeding $1b in USD volume or about $200mm per day. We expect USD liquidity to increase considerably as both public and private capital increases exposure to thee real estate sector and new issuances come to market.
But that’s only part of the story since USD volume doesn’t take into consideration the impact of 50% FX devaluations; rather it is exacerbated by the currency impacts. We normalize historical trading volume and it’s clearly evident that while USD volume continued to decline in 2015, nominal volume did not. Why? Local investors. In effect, while global investors were busy selling the currencies (and local assets), local investors were buying.
As the chart above illustrates, nominal trading volumes are actually above 2012 levels, whereas USD volume has a little ways to go. Our take on this is over the last five years, local participation in capital markets only grew stronger which means, in effect, that global buyers are now competing for even fewer assets as local buyers tend to be large institutions who buy and hold. Given global demand for income producing assets, we see this as a perfect storm of sorts for public real estate – in particular REITs – since yields are exceptionally attractive for foreign investors. Notably, interest rate cuts in Brazil could really accelerate capital flows into the sector. Brazil non-REITs, for example, are up 34% on average in January 2017 alone.
Lastly, we index both USD and normalized trading volume and in our view, we think liquidity in the sector could easily surpass the 2013 highs – perhaps averaging somewhere around $2b to $2.2b per week by 2018. Based on our stress tests, a listed product that references the LARE Index could easily handle $1b assets under management given current, historic and projected liquidity in the space.